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Heterogeneous response of disaggregate inflation to monetary policy regime change: The role of price stickiness

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  • Choi, Chi-Young
  • O'Sullivan, Róisín

Abstract

This paper explores how a monetary regime change affects headline inflation via differential effects on various sectors in the economy. Using disaggregated CPI data for Canada, we find that the response to the adoption of inflation targeting (IT) was quite heterogeneous across sectors. While sticky-price sectors experienced a notable change in inflation dynamics following IT adoption, little structural change was observed in flexible price sectors. Our analysis based on a common factor model suggests that the structural changes in the sticky price sectors are driven by a decline in their responses to common aggregate shocks, including a monetary shock.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 37 (2013)
Issue (Month): 9 ()
Pages: 1814-1832

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Handle: RePEc:eee:dyncon:v:37:y:2013:i:9:p:1814-1832

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Price stickiness; Sectoral inflation dynamics; Monetary policy regime; Inflation targeting (IT); Common factor model;

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